Organic label, bargaining power, and profit sharing in the French fluid milk market

The market for organic products increases continuously over time. Because consumers are willing to pay a premium for organic goods, firms may have an interest in developing organic production strategies and entering a profitable market segment. The objective of this paper is to assess the profitability of such a strategy and to determine how the value added created by the existence of an organic label is shared in a vertical chain among manufacturers and retailers. Using purchase data on the French fluid milk sector, we develop a structural econometric model of demand and supply that takes into account the relative bargaining power between manufacturers and retailers. Our results suggest that the organic label segment is more profitable as it permits the existence of higher margins. Moreover, an organic label allows manufacturers to achieve more bargaining power relative to retailers and hence to obtain a higher share of total margins. The econometric model is then used to assess the impact of an environmental policy in favor of the organic segment based on a mechanism of price support. Our results suggest that while a subsidy policy towards organic products benefits both manufacturers and retailers, a tax policy toward conventional products benefits manufacturers at the expense of retailers. Moreover, the environmental impact of the policy is mitigated and depends on the environmental issues at stake.